The Lowdown from Investment Quorum

November 26th, 2018

Global Markets to 26 November 2018 Highlights Stock markets continue to suffer over fears about the overall strength of the global economy and uncertainty as to whether late-cycle events will finally lead to the end of the bull market. The price of crude oil hits a new low for 2018 as worries persist over oversupply […]

Global Markets to 26 November 2018

Highlights

Stock markets continue to suffer over fears about the overall strength of the global economy and uncertainty as to whether late-cycle events will finally lead to the end of the bull market.

The price of crude oil hits a new low for 2018 as worries persist over oversupply and a possible slowdown in global growth.

EU leaders endorse the Brexit deal, but will the UK Parliament reject the agreement, triggering a Conservative party leadership battle or a general election?

The Eurozone suffers as Germany’s Purchasing Managers’ Index data for November misses its forecasts, as do those of a number of other EU members.

On the FX market, unrelenting US dollar strength affects sentiment for commodities, while weaker Eurozone data pushes the value of the currency down.

Global equity markets remain very volatile, affected by uncertainty over future global growth and doubts about the longevity of the bull market.

Global Market Summary

The financial markets maintain their downward trend as institutional and individual investors remain concerned about rising interest rates, Brexit, China, Italy, a slowing global economy and numerous other contentious issues. While 2018 is not a year of recession, continuous daily flashpoints and negative noise have kept market sentiment at a very low ebb.

In recent weeks, the weakness of Wall Street (particularly technology stocks) seems to have added further fuel to the fire, and the illustrious five – Facebook, Apple, Amazon, Netflix and Google [parent company Alphabet] – have all entered “bear market” territory. It is therefore no wonder that global investors have become very nervous, moving from a position of “risk on” to “risk off” in their portfolios.

There is also uncertainty about what the new global economy might look like in six to twelve months’ time. Our view is that we have firmly entered a transitional period, as central bank policy shifts from quantitative easing to quantitative tightening. This in itself was always going to raise questions and be a source of volatility on the financial markets – given that they have risen by so much since March 2009 when they bottomed out.

Needless to say, there have been a number of bumps along the way throughout the last decade, but overall, the markets have remained in a “bull market phase” as global investors have embraced risk assets while securing satisfactory or even exceptional returns (depending on their appetite for risk).

Usually, ”bull markets do not die of old age”– they are halted by global events and uncertainty. This uncertainty finally becomes overwhelming for investors, behavioural instincts then take over, and the bear returns to ravage the bull. The Goldman Sachs’ Bear Market Risk Indicator, which is a combination of economic, bond and equity market measures, is at its highest level since the financial crisis, and this has created further nervousness on the financial markets.

However, it can be argued that the recent correction and rising volatility are healthy, and will allow the financial markets to adjust to the transition of normalising interest rates, bond yields and risk assets – which have become expensive in certain regions, sectors and asset classes. A period of lower returns therefore seems likely, rather than an extended bear market. As far as this year is concerned, the likelihood of cash fund returns beating those of global equities, bonds and commodities is fairly certain. Even if there is a seasonal “Santa Claus rally”, the severe correction that occurred in regions such as the emerging markets, Asia (excluding Japan), frontier markets and China has already left many markets down by over 20% relative to their recent peaks.

The recent collapse in the price of crude oil is another economic indicator that is cause for concern: it has fallen by over a third since early October. This slide in oil prices has clearly been exacerbated by the disagreement between Saudi Arabia and Washington, with the Trump administration wanting to keep prices low. If, however, the global economy is experiencing a “soft patch”, or possibly something more sinister, then the prices of oil, copper and other commodities will weaken as demand deteriorates.

As far as the political backdrop is concerned, Brexit remains headline news, with the latest development over the weekend being the approval of the deal by the 27 EU members after 20 months of negotiations. But getting the deal approved by the UK Parliament will be very challenging for the UK Prime Minister, Theresa May. The UK Parliament is expected to vote on the deal in early December. But its approval is by no means guaranteed – many Conservative MPs are likely to vote down the 585-page document.

The effects of Brexit and the trade war tariffs are beginning to bite, with recent data from the Eurozone and China appearing to support this quite conclusively. For example, Germany’s recent Purchasing Managers’ Index data for November fell short of its forecasts, as did the data of a number of other EU members. This is worrying for the region, the European Union and the wider global economy.

It should, however, be remembered that a decade has passed since the global financial crisis. Logically, economic acceleration has now entered its late cycle; it is therefore perfectly natural for the global economy to experience a period of deceleration and higher volatility. Similarly, with so many global events still to be resolved and reach a conclusion, it would seem sensible to adopt a more cautious approach.

Given that the transitional period from QE to QT will be demanding and lead to further paradigms shifts, a more defensive position is indeed appropriate at present. But the current technological industrial revolution will carry on, and giants such as Amazon, Alphabet and Facebook will continue to be global disruptors, persevering in their long-term objectives to transform and restructure our global economy.

We therefore believe that this period will yield opportunities, and for long-term investors, the selective buying of good-quality businesses at cheaper prices will turn out to be highly rewarding. However, we are likely to experience further short-term volatility and distress across the markets over the coming weeks and months.

Peter Lowman is the Chief Investment Officer at Investment Quorum, a Director of the company and an integral member of our investment committee.

This article does not constitute specific advice and investors should bear in mind that capital invested is not guaranteed. Investment Quorum is authorised and regulated by the Financial Conduct Authority.

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